DIGITAL COMMERCE How Canadian Small Businesses are Growing and Trading Internationally
CONTENTS Executive Summary 3 Our Base for Insights 5 Noteworthy Findings 6 - E-commerce accelerates growth for Canadian small businesses 6 - Selling online opens global export opportunities 6 - E-commerce builds strong local economies 7 Digital Commerce Unlocks Growth 8 Digitization Enables Small Business Global Trade 9 Bringing Local Economies into the Digital Ecosystem 11 Case Study: Saskatchewan 13 Challenges Remain but Opportunities Await 13 Conclusion 14 2 Digital Commerce
Executive Summary Canada is a global powerhouse for important trade sectors including automobiles, financial services, energy, forestry and more. But the landscape is shifting. The global trade environment is rapidly evolving due to the proliferation of technology, in particular internet and mobile technology. Every business and consumer are now walking around with a global supply chain, distribution network, retail store and transaction platform in their pockets. This transformative technology creates opportunities for even the smallest of businesses to effectively reach customers across Canada and around the world, essentially, for the first time in history. Despite the immense opportunity presented by the adoption of technology, only one in five Canadian businesses sells online. 1 As Canada looks to create a diverse and inclusive economy with a wide variety of trade partners, more Canadian businesses must embrace digital solutions. Digital small businesses are more efficient than traditional businesses and can generate higher revenue with less input. These businesses will help boost growth in local economies as the revenue generated by these digital businesses can then be spent on local services that are unlikely to Digital small businesses are more efficient than traditional businesses and can generate higher revenue with less input. be digitally delivered. And, finally, digital commerce adoption expands Canada s economy, making Canadian businesses front and centre in the minds of consumers around the world. As a global e-commerce ecosystem leader, and a champion for Canadian entrepreneurs, PayPal sees firsthand how digital solutions can help Canadian businesses harness the power of the digital economy to innovate and grow. For the first time, PayPal is releasing proprietary insights from our more than 250,000 merchant customers in Canada to demonstrate that a thriving digital commerce ecosystem leads to greater trade, employment and income opportunities for all Canadians. 3 Digital Commerce
4 Digital Commerce
Our Base for Insights We conducted an in-depth analysis of 4,000 small businesses in Canada, defined as those who sold more than $30,000 and less than $3 million per year using PayPal between 2016 and 2017, derived from our full merchant database of over 250,000. This small business dataset was fully anonymized from any personally identifiable information. We will refer to these businesses throughout report as digital small businesses. 4,000 small businesses sold more than $30,000 and less than $3 million per year using PayPal 5 Digital Commerce
Noteworthy Findings E-commerce accelerates growth for Canadian small businesses Canadian digital small businesses grow far faster than their offline counterparts. In 2017, they grew more than 22 per cent year-over-year. Comparatively, Statistics Canada reported that in 2016 (the last year for which data is available) non-financial industries grew less than one per cent year-over-year. More and more small businesses in Canada are jumping in to the global digital marketplace. Between 2016 and 2017, the number of digital small businesses grew by 18.6 per cent. Selling online opens global export opportunities Digital small businesses export at unprecedented rates. Sixty-three per cent of Canadian digital small businesses export. Statistics Canada data indicates that only about 12 per cent of Canadian small - and medium - sized businesses export goods and services. Digital small businesses that export grew more than digital small businesses that only sold within Canada. Exporting businesses saw three per cent more growth between 2016 and 2017 than nonexporting businesses. 6 Digital Commerce
While the United States and Mexico are two of the top 10 export corridors for digital small businesses, they are also looking beyond North America and selling into China, Great Britain, Japan and Australia. E-commerce builds strong local economies Rural, suburban and urban small businesses all leverage the Internet in the same ways to grow. Digital small businesses located in rural parts of Canada grew about 18 per cent between 2016 and 2017, while urban businesses grew about 21 per cent. Suburban businesses outperformed and grew at 46 per cent year-over-year. Digital small business growth is seen across Canada. For example, small businesses in Nova Scotia saw 47 per cent growth year-over-year from 2016 to 2017, while businesses from Manitoba saw 30 per cent year-over-year growth. 18.5% 46.5% 21.3% Rural Suburban Urban In a deep-dive on Saskatchewan, we found that some of these trends were even more pronounced. Digital small businesses from Saskatchewan grew an astounding 55 per cent year-over-year in 2017. Those that exported grew even faster at 61 per cent. 7 Digital Commerce
Digital Commerce Unlocks Growth Opportunities for Small Businesses Small businesses are the lifeblood of the Canadian economy. Statistics Canada data from 2015 (the last year that it was available) reports that small- and medium-sized businesses (SMEs) represent 98 per cent of all Canadian businesses and employ over 8.2 million individuals in Canada. 2 These businesses are the job creators, innovators and entrepreneurs. Small businesses have been an essential part of the decade-long recovery in Canada in the wake of the financial crisis. 3 However, the Organization for Economic Cooperation and Development (OECD) finds that in the last few years, small business dynamism and productivity growth has started to wane. 4 The OECD finds that small firms embracing cutting edge technology are continuing to grow, while those that do not are falling behind. 5 PayPal data from 2017 echoes these findings, showing that only 17 per cent of Canadian small businesses are online. 6 According to emarketer, Canadian e-commerce spending is expected to reach $42 billion this year, meaning small businesses are leaving money on the table. 7 Despite a lag in e-commerce adoption, data from PayPal demonstrates the positive impact digitization can have, and is having, on Canadian small businesses. Digital small businesses are growing by leaps and bounds. In 2017, Canadian digital small businesses grew more than 22 per cent year-over-year. 8 In 2016 (the last year for which data is available) Statistics Canada reported that non-financial industries grew less than one per cent yearoveryear. Moreover, e-commerce sales in Canada have been projected to grow at about 12 per cent per annum from 2014 to 2019. 9 Digital small businesses are vastly outpacing those expected growth rates. Small Businesses Growth (% year-over-year) 25 20 15 10 5 0 Canadian Small Businesses E-Commerce in Canada Digital Small Businesses Figure 01 8 Digital Commerce
Digitization Enables Small Business Global Trade Trade has always been a challenge for small businesses in Canada. The high fixed costs and multitude of complexities associated with trade have created barriers to entry that many small businesses struggle to overcome. In 2014, just 73,000 small and medium businesses (less than 12%) exported goods and services, according to Statistics Canada. 10 Some provinces, however, export even less. For example, only one and a half per cent of small businesses in British Columbia exported in 2015. In contrast, digital small businesses export at far higher rates than traditional small businesses. Almost two third of Canadian digital small businesses export (Figure 02) and these businesses grow about three per cent faster than digital small businesses that don t export. Small Businesses Exporting (% ) Digital Small Businesses Canadian Small Businesses 0 10 20 30 40 50 60 70 Figure 02 9 Digital Commerce
Digital small businesses help to diversify Canadian trade. Ninety per cent of traditional Canadian small- and medium-sized businesses that do export, do so only to the United States. 11 In contrast, digital small businesses export around the world. Over 35 per cent of digital small businesses export to more than one market; and almost one in three export to three markets or more. Our data indicates, there is one digital small business that exports to 80 countries around the world. The United States and Mexico are two of the top 10 export corridors for digital small businesses. 2 Digitization helps these small businesses to diversify beyond North American markets and sell to consumers and businesses around the world. Small Businesses Exporting Beyond the US (% ) 40 35 30 25 20 15 10 5 0 Canadian Small Businesses Digital Small Businesses Figure 03 10 Digital Commerce
Bringing Local Economies into the Digital Ecosystem Digitization can lead to more inclusive growth and trade by expanding opportunities to traditionally underserved small businesses. Eighty-one per cent of Canada s population is urban. 13 Urban small businesses have traditionally had more access to customers and therefore seen higher growth rates. Now, the internet enables businesses, no matter where they re located, to have access to expanded customer bases and associated growth. As a result, rural and suburban small businesses have been able to grow in the same way as their urban counterparts. More specifically, digital small businesses located in rural parts of Canada grew 18 per cent between 2016 and 2017, while urban businesses grew at 21 per cent. Suburban businesses grew the most, at a staggering 46 per cent year-over-year (Figure 04). Growth Rate (% year over year ) Urban Suburban Rural 0 5 10 15 20 25 30 35 40 45 50 Figure 04 11 Digital Commerce
The leveling of the playing field between urban and rural businesses is perhaps the most important aspect of the digital transformation. For the first time in history, rural businesses can access the same set of customers as urban businesses. The implications of this new form of inclusive commerce are transformative. A business can now enjoy the revenue benefits of moving to a major urban centre while remaining local, bringing that revenue back to its local community. Moreover, a provincial analysis reveals that small businesses across Canada are enjoying the benefits of digitization. In Nova Scotia, for example, digital small businesses grew 47 per cent year-over-year from 2016 to 2017, while businesses from Manitoba saw 30 per cent year-over-year growth (Figure 05). Province Growth 2016 to 2017 ON 26.2% QC 13.4% BC 20.7% NB -3.3% NT 161.1% AB 20.5% NL 17.4% SK 55.8% MB 30.1% NS 47.1% PE 6.2% YT -2.3% Weighted average 22.4% Figure 05 12 Digital Commerce
Case Study: Saskatchewan A deeper analysis of Saskatchewan demonstrates the incredible impact of digitization on small businesses in Canada. Small businesses make up 99 per cent of the businesses in Saskatchewan, and are responsible for 31 per cent of the province s GDP. 14 These businesses grew by three per cent year-over-year in 2016. 15 This is far above the national average of less than one per cent, but still pales in comparison to the growth rates for digital small businesses. Digital small businesses from Saskatchewan grew an astounding 55 per cent year-overyear in 2017. Those that exported grew even faster at 61 per cent. Almost 40 per cent of these exporters sell to three or more markets around the world. These exporters came from rural, suburban and urban parts of Saskatchewan. Challenges Remain but Opportunities Await Digital literacy remains a challenge for small businesses. Over 40 per cent of Canadian small businesses still don t have a website and less than one in five Canadian small businesses accepts online payments. The federal government set up a program in 2017 to focus on digital literacy for entrepreneurs, yet far more can be done. Public private partnership could help to bring the latest technology solutions directly to those entrepreneurs that need it most. The public sector already has inroads to these businesses through training and lending programs. Partnering with technology companies on digital education could yield tremendous benefits. Small businesses continue to have concerns with taxes and regulations. World Bank statistics indicate that Canada is one of the top places to launch a new business. Canada, and specifically provinces like Ontario, have enacted tax reforms that have reduced rates for small businesses. These regulatory changes can be important growth drivers for small business. Customs, duties, and paperwork are a concern because they are disproportionately complex for small businesses to navigate. Simplifying and digitizing these procedures for small businesses could yield enhanced growth and trade. 13 Digital Commerce
Conclusion The digital revolution is transforming small businesses all across Canada. These digital small businesses enjoy enhanced growth, extensive exporting and the ability to locate their businesses in local communities. Challenges remain on the path to ubiquitous use of digital technology among the small business economy, but opportunities abound for how to resolve those challenges. If we can enable all Canadian small businesses to embrace digitization, then we can expect to create a more inclusive economy that benefits all businesses, regardless of size or location. 14 Digital Commerce
Provincial Breakouts This section looks at specific provinces in Canada and provides breakouts from our analysis of digital small business between 2016-2017. Saskatchewan Growth Growth by Exporters Share that Export Share that reach more than 3 markets Urban Growth Suburban Growth Rural Growth 55.8% 61.4% 44.8% 39.4% 67.2% 12.0% -27.2% Ontario Growth Growth by Exporters Share that Export Share that reach more than 3 markets Urban Growth Suburban Growth Rural Growth 26.2% 28.7% 63.9% 33.1% 26.4% 28.2% 18.4% 15 Digital Commerce
British Columbia Growth Growth by Exporters Share that Export Share that reach more than 3 markets Urban Growth Suburban Growth Rural Growth 20.7% 24.2% 70.5% 31.3% 16.8% 81.2% 9.8% Nova Scotia Growth Growth by Exporters Share that Export Share that reach more than 3 markets Urban Growth Suburban Growth Rural Growth 47.1% 31.5% 66.1% 26.4% 45.8% 29.8% 79.5% 16 Digital Commerce
References 1 PayPal Canada 2017 SMB Landscape Study 2 Government of Canada, Key Small Business Statistics - June 2016 3 Benjamin Tal, Canadian SMEs The Cycle and Beyond, October 10, 2017 4 OECD, Policies for Strong and More Inclusive Growth in Canada (2017) 5 Id. 6 PayPal Canada 2017 SMB Landscape Study 7 emarketer Forecast: January 25, 2018 https://www.emarketer.com/report/ecommerce-canada-2018-emarketers-latest- Forecast-with-Focus-on-Grocery/2002204 8 https://www150.statcan.gc.ca/t1/tbl1/en/cv.action?pid=3310000601 9 JLL, E-commerce in Canada, Overview, Risks and Trends (2016) 10 Government of Canada, Key Small Business Statistics June 2016 https://www.ic.gc.ca/eic/site/061.nsf/eng/h_03018.html 11 Benjamin Tal and Royce Mendes, Canadian SMEs: Strength beneath the surface, April 19.2017 12 Benjamin Tal, Canadian SMEs The Cycle and Beyond, October 10, 2017. 13 Farrow, Ecommerce to/from Canada (January 30, 2018) 14 Government of Saskatchewan Small Business Profile 2017, Ministry of Economy (October 2017) 15 Id. 16 CIRA, The State of E-commerce in Canada (March 2016) 17 OECD, Policies for Strong and More Inclusive Growth in Canada (2017) 18 KPMG, Ontario Drops Small business Tax Rate for 2018 17 Digital Commerce